Cost Plus Agreement Example
While cost-plus contracts are designed to avoid cost overruns, critics argue that cost-plus fixed-price contracts do not encourage contractors to further reduce costs. It covers direct and indirect costs, plus a pre-established fixed levy. A cost-plus premium fee provides for a premium fee set and set in the contractual documents. The tax can be a gratitude or a penalty. Overheads: Overheads are expenses necessary for a contractor to manage the administrative part of the business. These include expenses such as rent, insurance, communication, office supplies, administrative treatment, licensing, legal fees and travel expenses. costs plus percentage of marginal overhead and profit costs: on this basis, the contractor is not encouraged to complete the work quickly or at the lowest cost; The more time the contractor spends and takes, the greater the benefits. Cost-plus contracts are important in the construction industry, where the contractor is reimbursed for the number of expenses he made for the contract and a fixed percentage of contract costs as a contractual benefit. This type of contract can be used if the budget is limited or if there is a high probability that the actual cost of the work will be reduced. A cost-plus contract is preferred when there is not enough data to make a detailed estimate of the work or if the project is not completed.
The government prefers these contracts because they can choose the contractor on the basis of their qualification rather than the weak bidder. Cost-plus is often used for research and development because risk can be controlled by the agent. Between 1995 and 2001, fixed cost plus contracts were the largest subgroup of plus cost contracts in the U.S. defence sector. Starting in 2002, premium fees plus contracts took the lead in fixed costs plus orders. The use of a cost-plus contract can have drawbacks. Since a contractor must justify the reasons why the expenses are related to a project, this may require additional efforts to manage and track all related expenses. For disorganized contractors, a cost-plus contract could really create some problems.